Tuesday, May 17, 2011

Gasoline prices at the pump have only just begun to decline. This chart from Bloomberg, which shows gasoline futures prices (white line) and gasoline prices at the pump, according to the Auto Club (orange line), suggests that pump prices should fall to $3.50-3.60/gallon once the dust settles, based on the decline in gasoline futures prices that has already occurred.

This next chart compares gasoline futures prices (white line) to crude oil futures prices (orange line). The action to date suggests that gasoline futures prices could decline a bit more, given the decline in crude which has already occurred. This strengthens the case made above for a substantial decline in gas prices at the pump.

In very short order, the reversal of energy prices has removed a potential stumbling block to continued economic growth, and that is good news.

You keep refering to today's stock indexes trading at the same levels 10-12 years ago. True, but implicit in your comment is that the value of those indexes 10-12 years ago was priced correctly. I'm not the expert, but it seems to me that the Fed was pumping dollars into the economy to stave off the Y2K "calamity" and therefore may have helped to pump up stock prices artificially back then. Remember when a stock like Priceline was sky high even though it really didn't have any earnings to support it? Take a look at the S&P 500 chart going back to the 1950s and you'll see it really didn't move much until the 1980s. Maybe we're just expecting too much based on some wild spikes in the late '90s and for a brief period from '06-'07 rather than on a more thougtful analysis of the history of stock prices.

The market was frothy in 1999 (I don't like attributing every bubble to the Fed. The Fed is like a bartender--but still the patrons are responsible for their consumption. If investors like dot.com stocks, or houses, or commodities, and place bets--is that all the Fed's fault?Conversely, should we continually suffocate our economy--a monetary noose--just so we have no bubbles? Deflations and depressions are even less fun.)

My point is that we hardly can said to be facing inflation if real estate prices are sinking, unit labor costs are going down, and the S&P 500 (an inflation hedge) is still down at 1999 levels.

What kind of fey inflation is this?

I am deeply worried that we are, in fact, doing a Japan. Fiscal spending, but tight money. It did not, and has not, worked in Japan for 20 years.

BTW, with the end of QE2, the markets seem to be going "poof." Commodities, stocks and real estate. Poof, poof, poof. Martin Feldstein predicted this.

I think it will be another month or two, and some sort of QE3 will become politically palatable.

Benjamin and Bill, you both make some good points. After a bubble peak in NASDAQ or in real estate, it is not unusual at all for the prices of those asset classes not to exceed their old peaks for 15 years or more.For example gold at $880/oz in 1980 which was not exceeded until 2010. Or IBM's peak in 1969, not to be exceeded until the early 1980s.

But those examples certainly haven't precluded inflation from occurring most years in other areas. One should not look for inflation in real estate or NASDAQ asset classes but rather in other areas like natural resources of all classes - soft and hard.

For the USA, stagflation seems like a reasonable out-come to me. As for bonds not reflecting rising inflation expectations, there seems to be a persistence of the great fear bought on by the panic of 2008 - 2009. Apparently there are many investors who are scared to death of another major fall in markets who rush to bonds at every opportunity to hide from the possible calamity.

Not surprisingly, perhaps the extremely weak housing market is the underlieing key to how various asset class investors feel about the future. The housing market's persistent weakness is the only truly new situation which none of the markets are accustomed to experiencing.

However, the DJIA also hit an all-time high 14,164 in 2007. We are still below that high also. So, in real estate and in equities, we are well below recent highs, and treading water. 10-year Treasuries are offering 3.11 percent, and have been going down (in yields).

Until QE2 ended, and the results started coming in, I was optimistic. Now I am worried again.

Bernanke has yielded to lunatic mau-mauing by people who think there is a moral virtue in lopping a monetary noose around your neck and pulling hard. People who conflate reckless federal civilian and military outlays with appropriate monetary stimulus.